Netflix glad 2011 over but 2012 may mean more pain

By Lisa Richwine

5 Min Read

<p>The headquarters of Netflix is shown in Los Gatos, California September 20, 2011. Netflix said on Sept. 18 it would separate its streaming video service from the DVD rental busines.Robert Galbraith</p>

LOS ANGELES (Reuters) - Netflix Inc probably would like nothing better than to put 2011 behind it. But 2012 may be no walk in the park either.

Investors, who have pushed Netflix shares up 50 percent since late November, believe the company that revolutionized the home video industry may have plugged a torrent of defections after a widely excoriated price hike and a bumbling attempt to hive off its DVD-mail business as "Qwikster."

But it still faces a deluge of competition, a tarnished brand, and a costly expansion that will erode bottom lines, at least in the short term.

Netflix wants to steer customers away from DVDs and into its streaming business. To do so, it is writing hefty checks to add more movies and TV shows to its online service, and has warned that content costs will nearly double this year. At the same time, Netflix faces the loss of newer movies from Liberty Media Corp's cable channel Starz at the end of February.

"2012 is going to be a transition year," said Piper Jaffray analyst Michael Olson, who rates Netflix "overweight" and has a $100 price target on the stock. "The good news for Netflix is expectations have been ratcheted down quite a bit."

When the video rental company led by CEO Reed Hastings releases fourth-quarter results on Wednesday, all eyes will focus on whether the company has stemmed U.S. subscriber defections that helped spark a massive selloff last year.

Hastings, once a golden boy of Wall Street who could do no wrong, was forced to backtrack on the Qwikster name change and at one point apologized for "arrogance," but the damage had been done.

Netflix lost more than 800,000 U.S. customers in the third quarter of 2011 and warned that DVD-by-mail subscriptions would decline sharply in the final three months of the year, triggering the company's largest single-day share price plunge since 2004. But the company said total U.S. subscribers, which includes customers who pay for the online streaming service, would be "slightly up" for the quarter.

Wall Street remains upbeat about its longer-term prospects - so long as it can navigate its costly international expansion and secure enough content to keep the likes of Apple Inc, Amazon.com Inc, and Dish Network Corp's Blockbuster at bay.

Netflix warns that it will swing into a loss this year as it expands to Latin America and parts of Europe.

"While we still believe Netflix has the potential to build a powerful global business, 2012 is likely to be ugly," Dougherty & Co analyst Steve Frankel, who has a "neutral" rating on Netflix and a $90 price target, said in a note to clients.

UPBEAT?

Shares in the company have rebounded by more than 50 percent since late November, when the stock cratered at $62.37, down from a July high of $304.79. On Monday, shares closed at $93.96 on Nasdaq.

That selloff might have been too dramatic for a company that boasted more than 25 million global subscribers at the end of September, analysts say. Some investors appear to be anticipating a return to subscriber growth.

Speculation that Verizon Inc or another company may want to buy Netflix also likely boosted shares in recent weeks, Harris said.

"The dropoff from the fall was an overreaction, and I think people are getting a little more optimistic," said B. Riley & Co analyst Eric Wold, who rates Netflix a "buy" and has a $125 price target.

Fourth-quarter revenue should reach $857.6 million and earnings per share should hit 55 cents, according to Thomson Reuters I/B/E/S.

For 2012, Wall Street is projecting revenue growth of about 13 percent to $3.6 billion.

Last week, Sanford Bernstein analyst Carlos Kirjner cut his 12-month price target on Netflix to $71 because he believes streaming subscribers and revenue growth will slow later this year without enough of an offset from international markets.

Harris projects U.S. subscribers for the fourth quarter to come in flat or gain a couple hundred thousand.

"Growth is incredibly important for this company," said Brett Harriss, an analyst with Gabelli & Co. "Netflix essentially needs to get very big very fast, because there is just a ton of competition gunning for them."